Is 2008 a Good Year to Elect Out of Installment Sale Accounting?

Investment real estate sales are large taxable transactions involving deferred payments. While installment sale accounting is automatic, taxpayers may elect out and recognize all of the income currently.

September 2008
by Douglas Chene, et al./Journal of Accountancy

Usually, taxpayers would rather defer income, but right now, it may make better sense to elect out of section 453 in which:

  1. the installment note period is short,
  2. adjusted gross income falls in the $200,000 to $300,000 range for taxpayers filing jointly and
  3. the taxpayer has a greater proportion of earned income than unearned income.

Our multiyear spreadsheet demonstrating these effects, considers different filing statuses, numbers of exemptions, and levels of income and deductions, as well as different contracting items such as selling price, basis, down payment, length of note and interest rate.

Forecasting Is Key

Empty nesters Jim and Jean decide to finance their purchase of a vacation home by selling a piece of investment land they've owned for many years. The land sells for $500,000 and has a $60,000 basis. Jim and Jean say that a deferred payment contract makes sense for them and for the prospective buyers. But, they ask their CPA, how should they structure the deal for tax purposes? In 2008, Jim and Jean also have $25,000 of qualified dividend income and $225,000 in earned income.

This has been excerpted from the Journal of Accountancy. Read the full article here.